REVENUE MANAGEMENT

What is hotel revenue management?

Robert G. Cross, the author of the book Revenue Management: Hard-Core Tactics for Market Domination defines revenue management as “the art and science of predicting real-time customer demand at the micromarket level and optimizing the price and availability of product.”

Simply, revenue management means predicting consumer behavior to sell the product at an optimal price every day. Therefore, the definition of hotel revenue management is straightforward: selling the right room to the right client at the right moment at the right price on the right distribution channel with the best commission efficiency. Sometimes revenue management is called yield management, but these terms aren’t interchangeable.

Revenue management is defined by interconnected components, which are

• Customer segmentation,
• Demand forecasting,
• Inventory management,
• Yield management, and
• Pricing.

Each plays a crucial role and greatly impacts the ultimate financial result of a hotel, so let’s describe them one by one.

ELEMENTS OF REVENUE MANAGEMENT

Customer segmentation

Customer segmentation is an important part of marketing and pricing as it allows you to define groups of travelers that visit your hotel and address them differently. For example, business travelers have different needs and preferences than backpackers on a budget, so you have to know your customer and be ready with the offers that fit each group.

However, there are more possible categories that you might want to identify and market to than just “business vs leisure”. Some typical segmentation criteria are

• demographic factors (age, gender, marital status, etc.),
• the trip’s purpose (business, sport or entertainment event, family vacation, wedding, etc.),
• stay duration,
• traveler status (new, returning, or regular),
• booking channel (direct, through an OTA, or walk-in), and so on.

Each customer group provides opportunities to gain extra profit — if you do it right. For example, you might offer discounts to your loyal customers, create tour packages for families, or negotiate rates with companies that have many business trips.

Further analysis can help you discover important trends in customer behavior. You might find out that some customer groups have a high rate of cancelations or no-shows, so it makes sense to focus your marketing efforts on other segments. Here, the technique that can help predict such disruptions is demand forecasting.

Demand forecasting

Customer demand is never static. It fluctuates depending on different factors such as the season, important events in the area, or even macroeconomic conditions. Demand forecasting is the analysis of information about past demand, as well as current and future events across all the customer segments. Based on this data, you can predict when the demand will increase or decrease, and develop the right pricing, marketing, and distribution strategy. 

This part of revenue management is especially important because it serves as a basis for setting prices, choosing distribution channels, creating promotions to engage more guests, or launching other marketing activities to increase occupancy. To learn more, visit our post about machine learning approaches to price forecasting.

Yield management

The goal of yield management is to define customer behavior and set the best price to sell rooms with maximum profit. This concept appeared much earlier than the concept of revenue management and is narrower. While revenue management is focused on the whole revenue of a business, including ancillary revenue and spendings, yield management focuses on the price and the volume of sales.

Yield management is closely related to both inventory management and demand forecasting since it aims at selling the greatest number of rooms at the highest possible price according to customer demand. Here are some of the tactics and tricks you can use to play around with your inventory and maximize revenue.

Maximum length of stay (MaxLOS) restricts reservations to a maximum duration. It can be used to limit the availability of discounted or promotional rates.

Minimum length of stay (MinLOS) restricts reservations to a minimum duration. It’s used during high-demand periods to encourage longer visits.

Closed to arrival means that no reservations are allowed with arrival on a particular day. It can be applied to lighten the workload of the front desk team on a busy day but is definitely risky as it can turn away some of the guests.

Allotment is giving your partners (such as wholesalers, travel agents, or event organizers) a pre-negotiated number of rooms to sell, often at a discounted rate.

Last room availability relates to a contract between a company and a hotel that fixes the room rate. It is done to support last-minute reservations for business trips and guarantee room availability for a pre-negotiated price.

Inventory management or distribution management

In revenue management, the term inventory refers to the product (i.e. rooms) sold. A room is considered a perishable product with a certain “expiration date”. It means that if you do not sell a room for tonight, you can’t sell it later. And if a room is not sold, a hotel loses money.

So, another core aspect of revenue management is choosing the right mix of distribution channels. The main channels you deal with are probably GDSs, OTAs, bed banks (or wholesalers), and metasearch engines. Using demand forecasting results for various customer segments and channels, you build the distribution strategy that will balance occupancy and revenue maximization.

For instance, hotels may use online travel agencies as the leading distribution channel, while making allotments for bed banks to fill in remaining rooms for a lower cost.

Pricing

Price is one of the main factors impacting a guest’s decision to choose your hotel. Pricing, or setting optimal rates for your inventory, is the key to maximizing your revenue. You have to carefully analyze the market to understand your customer and see booking trends. That will help you build the right pricing strategy for your hotel.

Note that you have to analyze demand and set your rates well in advance so that you have everything ready for travelers who prefer to book early.

Pricing strategies and approaches

You already know that it’s a good idea to base your pricing strategy on customer demand forecasts and the different groups of guests that you can carve out. However, there are several approaches to price setting. Let’s see what the main ones are.

Dynamic pricing

Dynamic pricing is about changing the room rates regularly (sometimes multiple times per day) according to market demand. Dynamic pricing strategies are built around selling the property for the best price possible. They are based on supply and demand ratio, as well as external and internal data. External data includes such data points as competitors’ prices, weather data, and booking patterns; while internal data includes segmentation, customer profiles, rates, etc.

Dynamic pricing strategies allow hotels to keep up with the market and maximize occupancy rate, as well as the other hotel revenue management KPIs (we’ll talk more about them in the next section).

Open pricing

Open pricing refers to creating different prices for reservations made by different guest segments at different time periods through different distribution channels, etc. Such flexibility allows you to maintain stable levels of occupancy and generate revenue even during low demand periods.

So, if dynamic pricing mostly focuses on the supply and demand balance, open pricing is more about varying profitability margins across segments and channels.

Open pricing requires building complex price matrixes based on accurate forecasts; however, it enables discount channels to generate revenue instead of closing them off.

Here’s an example to illustrate the concept. Imagine you have your standard room priced at $100 and your luxe suite at $200. But you know that there’s going to be an elite car show in the area so you can charge more for your luxes since they would be in demand. At other times, you expect a big business conference nearby, so you can discount the luxes to get them occupied together with standard rooms.

Additional pricing strategies

There is a wide variety of other pricing strategies that can be implemented (often in conjunction with one another):

Length of stay pricing can refer to either setting a minimum visit duration (can be effective during high-demand period) or offering a lower rate for longer stays (say, set a discount for reservations of more than 4 nights). The latter not only ensures higher occupancy, but might also lead to higher ancillary revenue.

Packages and value-added pricing is offering a bundle or package of services at discounted rates. You can include other hotel services in such packages (e.g., airport transfer, meals, spa, etc.) or partner with external providers (such as car rentals or tour agencies) to provide guests with special deals.

Cancellation policy can also impact your pricing strategy. For example, you offer higher prices with an opportunity to cancel the reservation and get a refund and vice versa.

Segment based pricing is setting different rates for different guest segments. For example, you can offer special rates or create special offers for those who book directly through your website (read on to learn more about the importance of encouraging direct bookings).

Exclusivity vs affordability are two opposite approaches when you either position yourself the highest (most exclusive) or the cheapest on the market. Depending on your property, you can promote yourself as a luxury place and target top-shelf travelers or as an affordable place for price-sensitive guests. Note that in the first case, it’s important to create and maintain an excellent reputation and also to be fully transparent with what you offer, letting your guests understand what they are paying for. In the second case, remember about the break-even point and don’t let high occupancy with low prices lead to losses.

FOR MORE INFO: https://www.altexsoft.com/blog/business/hotel-revenue-management-solutions-best-practices-revenue-managers-role/